What is a consignment?
Consignment is an arrangement between a reseller (consignee) and their supplier (consignor), that allows the reseller to pay for their products after the products have been sold. To start, the supplier sends the reseller some products without collecting any payment for them, and the reseller puts them up for sale in their store. Even though the products are at the reselling business, the supplier retains ownership of them until they are sold. The reseller eventually pays the supplier for the products they’ve sold and returns the products they haven’t.
Consignment can be used by any business that displays products in a physical store, but is mostly used by businesses that focus on selling a specific type of product. In order to make a consignment business model work in the long run however, it’s important that there is a strong supplier-business relationship to start off with. The most common types of products that are sold through consignment include fashionable clothing and shoes that change every season, antique items, handicrafts, and perishable items.
How does the consignment model help resellers?
Avoid losses associated with unsold products
Retailers don’t always manage to sell all of the products they receive from their suppliers. With the consignment model, since businesses don’t have to pay their suppliers unless they actually sell the products, it helps them save the additional costs.
Send back unsold products
In a typical business, unsold products end up lying around a warehouse and taking up space. But with a consignment agreement, all unsold products can be returned to the seller, which saves the reseller the extra cost of storing these products.
Experiment with selling new products
Not every business can experiment with selling products that they’ve never sold before. This is because they don’t know how the products will fare in the market, and they won’t want to risk investing in something they’re not sure about. But with the consignment model, they can experiment with selling new products without losing money if the products don’t sell.
Eliminate lag time
Generally, businesses restock their inventories at specific times, like the end of the month or quarter, based on factors like how fast their products are selling and the demand they receive. But when using this plan to restock, there’s a chance they face the problem of lag time, which is the time between selling a product and replenishing it. That’s why businesses that use consignment, restock their supply as and when they sell them, so that they can completely get rid of lag time.
How does the consignment model help the supplier business?
Save on inventory holding costs
Renting or purchasing a warehouse to store inventory is very expensive—this is one of the most common hurdles that businesses face when they’re starting out. With consignment, since suppliers distribute their products to other businesses and don’t actually store anything, they can save on warehousing costs.
Ensure products directly reach customers
Despite the popularity of buying and selling online, there are certain products that sell better if customers can see and test them before buying, like edible products, vehicles, and other machinery. Consignment improves a supplier’s chance of selling their products by making the products directly available for customers to buy in person.
How does a consignment work?
As mentioned earlier, businesses that follow a consignment model, pay their suppliers only after they sell the products. First, the supplier sends a shipment of their products to the reseller, while retaining ownership. The reseller then gives the supplier a unique account number, and uses this number to label each product from that specific supplier. For each product that’s sold, the reseller and supplier split the profits according to a previously agreed rate.
What are the drawbacks of selling on consignment?
While consignment can be helpful, it can also have some downsides. Let’s take a look at them:
Businesses that sell on consignment depend on suppliers to provide them with a constant supply of products. So if the supplier ever faces a delay, it can leave the reseller out of stock for a while.
Consignment also means that reselling businesses will not be able to keep all the profits they make, and will instead have to share a portion of them with their suppliers, when they pay for the products they purchased. While consignment is known to be a low-risk business strategy, it isn’t necessarily a money-making one.
Adopting a consignment model can benefit both resellers and their suppliers. For resellers, consignment can help save expenses related to unsold products, make it safer to try out selling new products, and get rid of lag time. And for suppliers, it can cut down on inventory costs and get products directly to in-person shoppers. There are however some drawbacks to look out for, but if properly managed, a consignment model can take a business to great heights.